Cash poor with a paid off home? How reverse mortgages and the home equity access scheme compare

If you’ve got money locked away in the equity in your home borrowing against it can make a huge difference to your lifestyle. Nicole Pedersen-McKinnon compares two of your options.

By Nicole Pedersen-McKinnon

To reach retirement with a fully paid-off home is the golden goal for many. But years of kicking a high percentage of income towards paying off a home can mean many retirees end up asset rich but cash poor.

So it’s comforting to know that there are ways to get some of the money you paid into your home back. Two options that let you access the equity in your home are the government’s Home Equity Access Scheme (HEAS) (formerly the Pension Loans Scheme) and a reverse mortgage.

The HEAS is essentially a government loan for eligible older Australians who own their own home outright.

A reverse mortgage is a commercial product, available once you hit 60. These work like a mortgage in reverse… you get the money but don’t make repayments. Instead, the debt rolls up and is repaid down the track from the eventual sale of your home by you or your estate (or sometimes by other means).

In both cases, you can choose how much of your property’s value you offer as security.

Read these first:

‍The pros and cons of a reverse mortgage

The pros and cons of the government’s home equity access scheme

A large lump sum or fortnightly payments

Both the HEAS and commercial reverse mortgages offer negative equity protection – your loan can’t grow to more than the value of the property it is secured on.

Also in both cases, your loan needs to be repaid if you sell your property or move out of your property or be paid from your estate in the event of your death. 

The ultimate repayment of the loan is from the sale of your property and is plus interest… but in the case of a HEAS, the interest goes to the government – while interest from a reverse mortgage goes straight to the bank.

With both a HEAS loan and a reverse mortgage, you can choose to make earlier repayments to pay your loan down. This is entirely up to you with the HEAS, but may be subject to certain conditions for a reverse mortgage, depending on your agreement.

Reverse mortgage the ‘money up front’ option

Another important thing to note is that unlike with a reverse mortgage, with the HEAS you don’t get the full loan amount upfront. Instead, you receive the majority of your loan in fortnightly instalments. This can be a beneficial way to supplement your pension income, but on the other hand, it can restrict what you do with your money.

On a positive note, with the HEAS it’s possible to transfer your loan to another property, including a new home. This is unlikely to be an option with a commercial reverse mortgage.

But HEAS is more cost-effective in the long run

The interest and fees on a HEAS loan are also likely to be far cheaper than on a similar amount borrowed using a reverse mortgage. At the time of writing, the current interest rate on a HEAS loan was 3.95% (roughly equal to inflation). 

According to Finder, reverse mortgage interest rates were sitting at between 8-10% (ASIC estimates that reverse mortgage interest rates are typically 1–2% higher than a standard home loan.)

As a result, at the end of your loan period you’ll end up owning a lot more equity in your home with the HEAS than with a typical reverse mortgage.

Overall, compared to a reverse mortgage, the official home equity access scheme is a far more restrictive but far cheaper option for asset-rich and cash-poor Aussies to access the equity in their home.

What are the other considerations in your choice?

A reverse mortgage can affect your eligibility for the Age Pension - up to $40,000 is exempt from the assets test for up to 90 days if you draw a lump sum from a reverse mortgage. However, it is immediately subject to deeming by the income test until you spend it.

The government’s home equity access scheme does not.

But payments from neither a reverse mortgage nor the government home equity scheme are taxable, because they are loans borrowed against the value of your home.

In terms of your other considerations before accessing equity from your home, your future aged care requirements – and their cost – are big ones.

It’s worth asking if you are able to protect a portion of your home equity from being eroded by the loan – crucially, to ensure you have enough money left for aged care.

Of course, your other consideration could be your kids. (Or it may not!)

SKI-ing away or staying put

Though your debt can’t grow more than the value of your home with either the HEAS or a commercial reverse mortgage, the latter may still leave you with very little left.

Forget bequeathing money… you are going SKI-ing and Spending the Kids’ Inheritance.

With an intergenerational wealth transfer of an estimated $3.5 trillion happening in the next two decades, as the bulk of the owners of Australia’s property push over 60, their intentions for their kids will be key.

A new survey by AMP of 2000 Australians aged 50 years and over about attitudes to using a home to help adult children is enlightening… and probably informing as hundreds of thousands of us drawdown our super.

Firstly, note that retirees and people approaching retirement do not think their children have it easy – 4 in 5 over 65s believe the challenges are either similar or harder to when they were growing up. Housing unaffordability and rents were the notable ones.

But retirees also hold a strong attachment to the family home, with a reluctance to downsize to free up money to support their children – just 7 percent would consider it.

However, 20% report a willingness to support their children by providing a roof over their head, which could restrict access to a reverse mortgage. Or even leave said children without said roof when the reverse mortgage (or HEAS for that matter) needs to be repaid on their parents’ death.

Will the trend for kids taking longer to move out of home – Melbourne Institute research indicates half of Australians aged 18 to 29 are still living at home – stymie the uptake of equity extraction?

But here’s a further indicative stat from AMP: 3 in 4 Australians aged 65+ believe it is important to pass wealth onto their children. Indeed, of those aged 50+, almost half would consider passing home equity value to their children if they could stay in the family home.

So there are conflicting attitudes – and priorities – at work. But the question to ask is this: is your equity extraction tool of choice – either commercial or governmental – the solution to not compromising your lifestyle?

Nicole Pedersen-McKinnon is the author of How to Get Mortgage-Free Like Me, available at www.nicolessmartmoney.com. Follow Nicole on Facebook, Twitter and Instagram.

^{Advice given in this article is general in nature and does not take into account your personal circumstances. It is not intended to influence readers' decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.}